Who Holds Sovereign Debt and Why It Matters

This paper studies the impact of investor composition on the sovereign debt market. We construct a data set of sovereign debt holdings by foreign and domestic bank, non-bank private, and official investors for 101 countries across three decades. Private non-bank investors absorb disproportionately more debt supply than others. Moreover, non-bank investors’ demand for emerging market debt is most responsive to its price. Counterfactual analysis of emerging market sovereigns shows a 10% increase in debt leads to a 5.8% yield increase, but an out-sized 8.4% increase without non-bank investors. We conclude that sovereigns are vulnerable to the loss of non-bank investors.